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Analyzing The Key Differences Between Bitcoin and Bitcoin Cash

03/13/2019
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  • BCH_BTC
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The Origins of the Two Cryptocurrencies

Bitcoin (BTC) was founded in 2009 by an anonymous entity known as Satoshi Nakamoto (it could be a single person or a group). On the 3rd of January 2009, the genesis block of the cryptocurrency was created /mined with the following message embedded “Chancellor on brink of the second bailout for banks” along with a reference to the Times magazine from the same day. This message ridiculing the failures of fractional-reserve banking might be a valuable indication about the motivation and philosophy behind the cryptocurrency.

BTC is the first decentralized cryptocurrency invented – this means it is not managed by any central bank or administering authority, and transactions do not need intermediaries to be carried out. Like with other cryptocurrencies, user-to-user transactions are verified by network nodes and recorded in a blockchain (this is the notion designating a public distributed ledger storing data in a decentralized manner). The blockchain contains encrypted, cryptographically linked blocks of records for every transaction that has ever happened dating back to the genesis block.

By contrast, Bitcoin cash (BCH) is much younger cryptocurrency – its birth date can be considered August 1, 2017, when it was created through a ”hard fork” in the parent BTC blockchain by a group of influential developers, investors, miners. On this day, Amaury Séchet released the first BCH software implementation – miners running this program could validate transactions creating the new chain.

The process essentially created a new version of the Bitcoin chain that worked according to BCH rules. Later a formal separation of the two currencies occurred. Due to this common origin, BCH and BTC share an identical transaction history up to the day when the “hard fork” happened. This also explains other similarities, as detailed below.

Conceptual and Technical Differences and Their Implications

Although originally developed to function as peer-to-peer electronic cash, BTC has evolved into a cryptocurrency to store money rather than make regular daily payments. This is because BTC transactions take time to be processed (at best, every information is “moved” into a block every 10 minutes, but this can be affected by significant delays), while the operating costs even peaked to more than $35 per transaction during the Bitcoin mania period. The high costs can be explained in part due to underlying technological limitations and in part, due to the increasing number of transactions, especially during the popularity spike.

The new cryptocurrency BCH was created primarily as a response to the technical limitations of the BTC cryptocurrency, namely, the block size limit, which determined transaction speed bottlenecks. The small limit of the block size, which was originally 1 MB, makes it possible to process a maximum of 3.3 - 7 BTC transactions per second, which turns out to be too little compared to historic demand. Thus, during the peak of Bitcoin mania at the end of 2017, more than 200.000 transactions were waiting to be confirmed by miners.

The new currency BCH has attempted to solve this problem by introducing a block size limit of 8 MB (and that can be further increase), which allows more transactions being processed at once – this increased transaction speed and led to lower transaction processing fees (the fees are bound to increase somewhat in case of a massively growing popularity and user base). The new system allowed many more transactions (40-90 per second, which translates into several million per day).

On the other hand, small block sizes are essential to allow decentralization of the network (if they are too big, few nodes/miners can "afford" the computational resources to process them). Given that the BTC blockchain adds 1 MB blocks every 10 minutes, the current size of the blockchain exceeds 200 GB - if the block size was significantly bigger, so would be the blockchain, preventing access by most users due to their limited storage capacity.

In addition, a highly decentralized network is much more secure than a centralized one. Larger blocks would also require greater bandwidth to exchange them over the web and to verify them. Thus, an increasing block size leads to centralization but allows faster transactions (so it comes at a cost).

Market Characteristics

Both cryptocurrencies differ a lot in value. Thus, as of February 6, 2019, BTC is valued at roughly $3800, while BCH – at only $130. Being the first cryptocurrency to gain traction, BTC is the obvious champion among cryptocurrencies when it comes to market capitalization – the latter is calculated by multiplying the total number of shares by current share price. Namely it has a market cap of $67.53 billion - by contrast, BCH has a market cap of $2.3 billion, which is only 3.4% of the first.

As for the market supply (the total amount of coins that have been already mined and are available for transactions), it is identical for both cryptocurrencies, at around 17.57 million coins (as of February 2019) out of a maximum of 21 million coins that can be mined in theory. The identical supply can be explained by the common origin – both have the same halving rate of the supply, occurring at the same block heights.

Branding

The value of the Bitcoin (BTC) brand is obviously incomparably higher compared to BCH – it is not a coincidence that many new cryptocurrencies try to incorporate the word “Bitcoin” into their own name. BCH is not an exception (although the common origin might serve as a justification). It is very natural to assume that BCH benefits significantly from the hype around the “Bitcoin” brand.

Moreover, this does not seem to be coincidental, as there are many other advances BCH makes into the territory of BTC, which are not modest at all. For instance, the official BCH site is bitcoin.com and one can hardly find a direct mention of the name “Bitcoin Cash” there (even BTC is referred to as Bitcoin Core on this website); the logos of the two currencies are almost identical apart from the coloring scheme and the different inclination of the main symbol. An uninitiated person visiting the website, might not become aware of the distinction between these two currencies and it is rather unpleasant to realize that this might be done on purpose.

Critical Evaluation of the Viability of Each Currency

Despite the larger block size advertised to drive BCH excellence, the truth is BCH has never mined a block of 8MB in size! As reported by LongHash, the average block size of BCH since the moment it was founded up until now is roughly 171KB, which represents only 2.1 percent of its maximum limit. This average is in fact about 30 times smaller than the average BTC block size (1 MB). Only on one day throughout its evolution, on January 15, 2018, BCH block size exceeded half of its maximum capacity, reaching roughly 4.7 MB.

Obviously, this does not abolish the advantage BCH brings, but when considering that this was the chief motivation for its creation, the argument looks weaker in the market context we witness nowadays, when interest for all cryptocurrency has decreased following a bubble and considering that the parent currency, BTC, is also adapting technologically to address its limitations.

Thus, one of the solutions employed by BTC was the Segwit “soft fork”, that addressed a number of limitations among which the block size limit, allowing it to be increased to 2MB by segregating transaction data and managing it differentially. As of July 2018, roughly 40% of transactions were performed with Segwit and this number continues to grow. By comparison, BCH has not adopted Segwit but decided to increase the block size instead (to 32 MB).

Another major breakthrough for the market leader (BTC) involves the development of a second layer that functions on top of the main blockchain – the Lightning Network. It is considered to be the long-anticipated solution to Bitcoin’s scaling problem. In case of success, this will ensure almost instantaneous and almost free BTC payments. It is already being adopted by BTC nodes at an impressive rate. Interestingly, the Lightning Network would enable free cross-platform swaps (trading one crypto coin for another without fees).

Bitcoin is more ubiquitous, more widely accepted for crypto payments. In fact, Bitcoin is the trendsetter for virtually all other cryptocurrencies on the market (as a proof, all of the latter peaked in value shortly after BTC peaked around December 2017 and then were dragged down by the negative evolution of BTC).

Although the historical maximum was very high, currently, transaction fees for BTC decreased to a level on the order of tens of cents. This still does not beat the price of BCH transactions - on the level of a tenth of a cent (and typically settled within 10 minutes) but are much more tolerable.

BTC has the greatest network of active nodes running – currently, more than 11.000, which greatly reduces the chance of a 51% attack (Given that a consensus of nodes is used to validate/process transactions, in case a group of miners gets control of more than 50% of the hash rate/computing power, they could cancel any transaction, reverse transactions, double-spend coins, etc.). BCH has much fewer nodes.

In fact, BCH has been highly centralized throughout its evolution, with 3 major miners (Antpool, BTC.com, and ViaBTC) holding a total share of more than 50% of the hash power. If such entities unite, they can gain full control over the payment system. In November 2018, as a result of internal friction, BCH has undergone a “hard fork” of its own, when two distinct currencies were created: Bitcoin Cash ABC (the current BCH) and Bitcoin SV.

Which One to Go For?

Considering the information provided above, a natural question comes to mind: will one cryptocurrency outcompete the other or will both coexist in a complementary manner? Overall, it seems that BTC has much more solid positions due to its market cap, value, decentralized infrastructure (nodes and miners), recognizable brand name, a higher rate of adoption and trust, but also, due to its active community that comes with active innovative solutions to address technical limitations of the system.

In particular, if BTC manages to come with reliable solutions to its historic problems with the slow speeds and high prices for transactions (which seems to be the case), then it is going to continue dominating BCH and probably, the entire market. This does not necessarily mean the end for BCH. If BCH manages to capitalize on its utility as a peer-to-peer electronic cash system, decentralizes to gain trust, addresses its own limitations, and ensures high-security standards, then it could survive and evolve.

It is also worth keeping in mind that security is of paramount importance in the evolution of these cryptocurrencies. Hackers will keep attacking these in an attempt to exploit vulnerabilities as it has happened so far. Given the long history of BTC, a significant amount of this cryptocurrency was stolen by hackers. In case they get successful and manage to create disproportionally high damage to a given cryptocurrency, besides the direct financial damage, this can determine users to lose their trust in this currency (which equals a lower trading value, lower market penetrance, less enthusiastic adoption).

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